BRITAIN’S property market faces severe disruption as it adapts to life after ultra-low interest rates, with concern mounting that house prices are set for a significant fall in 2023.

The Bank of England raised its benchmark lending rate on Thursday (Nov 3) to 3 per cent – a three-quarter percentage point rise that was the biggest single increase since 1989. That means borrowing now costs more than at any point since 2008. The move was the latest warning sign for the housing market, coming after mortgage rates jumped following the September “mini-budget” and in the midst of an ongoing cost-of-living crisis.

Governor Andrew Bailey insisted that fixed-term mortgage rates should not need to rise in direct response to the latest hike. Nevertheless, it seems likely that homeowners will face persistently higher rates of 4 per cent to 5 per cent in the coming years, property portal Zoopla has said. That adjustment will weigh on prices, too.

“More than four million first-time buyer mortgages have been issued since rates were cut to 0.5 per cent in March 2009, meaning many people don’t have first-hand experience of monthly mortgage bills rising meaningfully,” said Tom Bill, head of UK residential research at Knight Frank.

Home loan prices soared above 6 per cent in the aftermath of former Prime Minister Liz Truss’s short-lived fiscal plan, and while rates have since stabilised, they are yet to come back to Earth despite a rally in UK government bonds.

There are plenty of other warning signs flashing across the housing market.

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The average value of a home dropped 0.9 per cent in October, the most since the start of the pandemic, according to Nationwide Building Society, while mortgage approvals, a reliable guide to upcoming housing activity, dropped more than 10 per cent in September. Both send clear signals that higher repayment costs are cooling demand.

The mini-budget wiped out about a quarter of the UK’s mortgage products by early October as lenders repriced loans; products are slowly returning to the market, but they are now more expensive and lending criteria have been tightened.

Zoopla said mortgage rates could stay above 6 per cent for the most of next year in a worst-case scenario, directly impacting property prices as buyers find they have less money to spend.

“This normalisation of rates plays a central role in our forecast that prices will fall back to their summer 2021 levels,” said Knight Frank’s Bill.

A worst-case scenario could see house prices crater by almost a third, Chris Rhodes, chief finance officer at Nationwide, told a Treasury Committee on Wednesday, citing rate rises and economic uncertainty as pressure points for the market.

Base case forecasts – which heavily influence rates – are more measured, though Lloyds Banking Group still predicts a 7.9 per cent fall in house prices next year. Barclays and HSBC Holdings are more bullish, both predicting growth in UK property prices in 2023. Banco Santander says a strong UK labour market will hold up home values.

Britain’s biggest homebuilders are also preparing for tougher times ahead. Barratt Developments said the average weekly number of homes reserved at its sales sites dropped more than 30 per cent between July 1 and Oct 9. The firm also announced plans to “substantially” cut investment in new land.

Rival homebuilder Bellway reported a similar drop in home reservations earlier this month, warning that pent-up demand for British properties triggered by the pandemic is beginning to fade.

Renters can expect higher rates to mean higher monthly bills, as the buy-to-let sector faces more stress than other areas of the mortgage market.

Ray Boulger, a manager at loan broker John Charcol, told lawmakers on Wednesday that a reluctance to purchase buy-to-let properties could have a “serious impact” on the availability of homes. The situation was particularly acute in London, he warned. BLOOMBERG